In an important policy change, the Federal Housing Administration (FHA) will start allowing income from accessory dwelling units (ADUs) to be considered in underwriting mortgages. The revised rules, announced October 16, will allow more borrowers to qualify for FHA-underwritten mortgages when financing properties that include a rental unit.
This article was written by Ben Abramson and was originally published by Strong Towns.
Under previous rules, only a duplex qualified as rental income for mortgage purposes. The revisions will also help existing homeowners finance new ADUs via the FHA’s renovation loan program.
“The new policies provide greater flexibility for the use of rental income from ADUs, which will help more borrowers qualify for FHA-insured financing on homes with ADUs,” said Deputy Assistant Secretary for Single Family Housing Sarah Edelman in a release.
The move is explicitly intended to increase housing supply by encouraging more homeowners to include rental properties when buying a home. The Biden administration also considers it a tool to address the wealth gap that affects many low-income neighborhoods by enabling “the generational wealth-building potential of homeownership.”
There has been substantial progress for expanding ADUs in local and state governments in recent years, where zoning rules have been amended to allow more incremental housing solutions. But housing advocates and developers have noted that, even as many places have started to allow more missing-middle solutions like ADUs and duplexes, the financing mechanisms of the housing industry have yet to catch up.
FHA underwriting is an important part of the home-buying ecosystem. The agency says that, of the 1.8 million mortgages it’s supported since 2021, 1.5 million went to first-time homebuyers. This change, which provides greater flexibility to mortgage providers, should enable more people to qualify for mortgages while providing entry-level housing in their neighborhoods.
“Allowing small-scale landlords to benefit from the benefits they bring to a neighborhood is good policy that will help with the housing crisis and enable economic mobility,” says Daniel Herriges, Strong Towns housing policy expert.
While the wording specifically emphasizes ADUs, the definitions make it clear that basement apartments would also qualify: “FHA defines an ADU as a single habitable living unit with a means of separate ingress and egress that meets the minimum requirements for a living unit. An ADU is a private space that is subordinate in size and can be added to, created within, or detached from a primary one-unit single-family dwelling.”
